SIEMENS CORPORATION F/K/A SIEMENS CAPITAL CORPORATION - DETERMINATION - 10/07/96

Transcription

1 SIEMENS CORPORATION F/K/A SIEMENS CAPITAL CORPORATION - DETERMINATION - 10/07/96 In the Matter of SIEMENS CORPORATION F/K/A SIEMENS CAPITAL CORPORATION TAT(H) (GC) - DETERMINATION NEW YORK CITY TAX APPEALS TRIBUNAL ADMINISTRATIVE LAW JUDGE DIVISION GENERAL CORPORATION TAX - PETITIONER DID NOT HAVE A REGULAR PLACE OF BUSINESS OUTSIDE THE CITY MERELY BECAUSE IT PAID AND ISSUED FORMS W-2 TO AN INDIVIDUAL WHO PERFORMED W ORK FOR A RELATED CORPORATION AT THAT RELATED CORPORATION'S WISCONSIN OFFICE. IT DID, HOWEVER, HAVE A REGULAR PLACE OF BUSINESS OUTSIDE THE CITY FOR ONE OF THE YEARS AT ISSUE BY VIRTUE OF THE NEW JERSEY OFFICE USED BY ITS TAX DEPARTMENT/THE TRIBUNAL DOES NOT HAVE THE POWER AND AUTHORITY TO DETERMINE WHETHER THE STATUTORY REQUIREMENT THAT A CORPORATION MUST HAVE A REGULAR PLACE OF BUSINESS OUTSIDE THE CITY IN ORDER TO ALLOCATE ITS INCOME IS CONSTITUTIONAL ON ITS FACE. THE TRIBUNAL DOES, HOWEVER, HAVE THE POWER AND AUTHORITY TO DETERMINE WHETHER THE REGULAR PLACE OF BUSINESS REQUIREMENT IS CONSTITUTIONAL AS APPLIED IN A PARTICULAR INSTANCE/AS VIRTUALLY ALL OF PETITIONER'S ACTIVITIES WERE CONDUCTED IN THE CITY, A ONE HUNDRED PERCENT ALLOCATION TO THE CITY WAS NOT OUT OF ALL PROPORTION TO THE AMOUNT OF BUSINESS THAT PETITIONER CONDUCTED IN THE CITY; NOR DID IT PRODUCE A GROSSLY DISTORTED RESULT. THE REGULAR PLACE OF BUSINESS REQUIREMENT WAS THUS CONSTITUTIONAL AS APPLIED IN THIS INSTANCE/WHERE, FOR VALID BUSINESS REASONS, PETITIONER INVESTED IN CERTIFICATES OF DEPOSITS WITH FOREIGN BANKS WHICH THEN MADE LOANS TO THE FOREIGN AFFILIATES USING THE CERTIFICATES OF DEPOSIT AS COLLATERAL, THE TRANSACTIONS WERE NOT RECAST AS DIRECT LOANS TO THE AFFILIATES UNDER THE SUBSTANCE OVER FORM DOCTRINE. PETITIONER THEREFORE PROPERLY TREATED THE CERTIFICATES OF DEPOSIT AS INVESTMENT CAPITAL/PURSUANT TO A PRECEDENTIAL FINDING BY THE STATE SUPREME COURT APPELLATE DIVISION, PETITIONER'S NONDOMICILIARY INTEREST INCOME WAS, FOR PURPOSES OF COMPUTING THE RECEIPTS FACTOR OF PETITIONER'S BUSINESS ALLOCATION PERCENTAGE, SOURCED ACCORDING TO THE COMMERCIAL DOMICILES OF THE PAYORS OF SUCH INTEREST. OCTOBER 7, 1996

2 NEW YORK CITY TAX APPEALS TRIBUNAL ADMINISTRATIVE LAW JUDGE DIVISION : In the Matter of the Petition : : DETERMINATION of : : TAT(H) (GC) SIEMENS CORPORATION f/k/a : SIEMENS CAPITAL CORPORATION : : Tillman, A.L.J.: On June 4, 1992, Petitioner, Siemens Corporation, f/k/a Siemens Capital Corporation, 1301 Avenue of the Americas, New York, New York, 10020, filed a Petition with the Commissioner of Finance (the "Commissioner" or "Respondent") for: (1) a redetermination of deficiencies of General Corporation Tax ("GCT") under Chapter 6 of Title 11 of the Administrative Code ("Code") of the City of New York (the "City") for the tax years ended September 30, 1981 (the "1981 Tax Year"); September 30, 1982 (the "1982 Tax Year," which with the 1981 Tax Year are referred to as the "Earlier Tax Years"); and September 30, 1983 (the "1983 Tax Year" which with the Earlier Tax Years are referred to as the "Tax Years"); and (2) a refund of GCT for each of the Tax Years. 1 At the time the Petition was filed, a petition was pending before the New York State ("State") Tax Appeals Tribunal's Division of Tax Appeals, protesting the assertion by the Commissioner of the 1 Pursuant to the provisions of sections 168 through 172 of the City Charter as amended by act of the New York State Legislature on June 28, 1992, Ch. 808, Laws 1992, section 140, on October 1, 1992, jurisdiction over this case, which had been pending before the Department of Finance's former Hearings Bureau, was transferred to the Administrative Law Judge Division of the Tax Appeals Tribunal.

3 State Department of Taxation and Finance (the "State Commissioner") of Franchise Tax deficiencies against Petitioner (the "State Case"). Although the State Case included the Tax Years and several of the same issues present in this case, neither party requested that this proceeding be held in abeyance (i.e., placed on our sine die calendar) pending the resolution of that earlier filed case. Hearing sessions were held before the undersigned on July 26, 1993, September 21, 1993, November 9, 1993, and January 10, Thereafter, on January 20, 1994, a State Administrative Law Judge issued a determination in the State Case -- Matter of Siemens Capital Corporation, DTA Nos and , 94-2 NYTC J-71 (the "State ALJ Determination"). The State ALJ Determination held, inter alia, that the State Commissioner had correctly recharacterized interest income resulting from a loan from Petitioner to Siecor Development Corporation (the "Siecor Income") as business (rather than investment) income. The State ALJ Determination also addressed the proper treatment of the interest income which Petitioner received from loans provided to corporations domiciled outside the taxing jurisdiction (the "Nondomiciliary Corporations") -- most of which 2 were affiliated with Petitioner. The State ALJ Determination held that the interest income that Petitioner received from the Nondomiciliary Corporations (the "Nondomiciliary Interest Income") constituted "other business receipts" (rather than payments for services) which were properly sourced outside the State. 2 Some of the affiliated corporations had their commercial domiciles outside the City but in the State and thus were treated as domiciliary corporations in the State Case. Those corporations, however, are treated as Nondomiciliary Corporations for purposes of this determination since their commercial domiciles are outside the City. Since Chappell & Co. is the only one of the relevant affiliated corporation whose commercial domicile was in the City, it is the only affiliated corporation that is not included as one of the Nondomiciliary Corporations for purposes of this determination. 2

4 After the issuance of the State ALJ Determination, hearing sessions were continued on February 28, 1994, April 18, 1994, and June 7, 1994 (when they were completed). Thereafter, on November 3, 1994, the State Tax Appeals Tribunal: (1) affirmed the State ALJ Determination as it applied to the Siecor Income; and (2) reversed it with respect to the Nondomiciliary Interest Income, which it found to constitute income from services which were properly sourced to the State, as that was where such services were rendered. Matter of Siemens Capital Corporation, DTA Nos and , 94-1A NYTC T-1226 (the "State Tribunal Decision"). Petitioner filed a post-hearing brief dated August 9, Respondent filed a reply brief dated August 25, Petitioner filed a reply brief dated September 5, On January 4, 1996, the Appellate Division, Third Department of the State Supreme Court reversed the State Tribunal by holding that the Nondomiciliary Interest Income was not income from services, but was instead "other business receipts" that should be sourced to the payors' commercial domiciles outside the State. In the Matter of Siemens Corporation, Formerly Siemens Capital Corporation v. Tax Appeals Tribunal et al., 217 A.D.2d 247, 635 N.Y.S.2d 806 (the "Appellate Division Opinion"). At my request, additional proceedings were held to address the precedential value of the Appellate Division Opinion. At a conference held on March 14, 1996, Petitioner indicated that the State Commissioner had filed a motion with the Appellate Division for leave to appeal the Appellate Division Opinion to the Court of Appeals. At the next conference, held on May 30, 1996, Respondent asserted that this Tribunal was not bound by the Appellate Division Opinion because there were substantial differences between the State Case and this case. Respondent further asserted that, contrary to Petitioner's allegation in its reply brief dated September 5, 1995, he had not conceded the issue 3

5 of whether Petitioner's income from certain certificates of deposits ("CDs") issued by foreign depository banks (the "Back-To- Back Income") should be treated, for GCT purposes, as having been received from loans of similar amounts and terms that were simultaneously made by those foreign banks to Petitioner's Latin American affiliates (the "Back-To-Back Loans"). 3 Since, at the May 30, 1996 conference, both parties stated that they did not want this matter held in abeyance pending final resolution of the State Case, I directed them to brief the issues of whether: (1) the Appellate Division Opinion was precedential with respect to how the Nondomiciliary Interest Income should be sourced, and (2) Respondent had conceded that Petitioner had properly categorized the Back-To-Back Income as investment income. Respondent filed a supplemental brief dated June 6, Petitioner filed a reply supplemental brief dated June 11, Thereafter, at a conference held on June 12, 1996, Petitioner's representative advised me that the Court of Appeals had granted the State Commissioner's motion for permission to appeal the Appellate Division Opinion. Petitioner appeared by Richard S. Payne, Esq. Respondent was represented at the hearing and on the initial briefs by Heloisa G. Rapaport, Esq. of the Department of Finance's Office of Legal Affairs; at the later conferences and on the later briefs by Amy Nogid, Esq., Assistant Corporation Counsel. ISSUES I. Whether Petitioner had a regular place of business outside the City and, if not, whether the Commissioner's use of a 100% 3 This issue was not pursued by the State Commissioner and thus was not addressed in the State Case

6 business allocation percentage was constitutional. II. Whether, for the 1982 Tax Year, the Commissioner properly recharacterized the Back-To-Back Income as business income. 4 III. Whether, for the Earlier Tax Years, the Appellate Division Opinion is binding precedent with respect to the issue of whether the Nondomiciliary Interest Income should be sourced inside or outside the City; and, if not, how such income should be sourced. 5 FINDINGS OF FACT 1. Petitioner, a wholly-owned subsidiary of Siemens Aktiengesellschaft ("Siemens A.G."), was organized to serve as a holding and finance corporation for various subsidiaries and affiliates of its parent corporation. As such, it performed a 4 In its August 9, 1995 brief, Petitioner conceded this issue with respect to the 1981 Tax Year. This concession appears to be predicated on Petitioner's belief that even if the Back-To-Back Income was deemed to be from the CDs (rather than the Back-To-Back Loans), that income could not be allocated using an investment allocation percentage because Petitioner had a zero City investment allocation percentage for that year. See, former Regulation section 4-50(d) in effect during the Tax Years: "If the investment allocation percentage used in allocating income is zero, interest received on bank accounts... is multiplied by the business allocation percentage; in other words, such interest is treated as business income." Petitioner did not concede this issue with respect to the 1982 Tax Year, however, as it had an investment allocation percentage of greater than zero, and thus could allocate its income from investment capital using its investment allocation percentage. 5 Issues I and II were not adjudicated in the State Case as the State's regular place of business requirement was repealed and the State Commissioner conceded that the Back-To-Back Income was investment (and not business) income. A fourth issue -- the propriety of the Commissioner's recharacterization of the Siecor Income as business (rather than investment) income -- was conceded by Petitioner in its August 9, 1995 brief

7 clearinghouse function, acting as a financial conduit to facilitate certain of the global operations of Siemens A.G. In the early 1980's, Petitioner's corporate operations in the United States were restructured, culminating with the October 1, 1982 merger of Petitioner's wholly-owned subsidiary, Siemens Corporation ("SC") into it (the "Merger"). After the Tax Years, Petitioner changed its name from Siemens Capital Corporation to Siemens Corporation -- the name previously used by SC. 2. In accordance with its stated purpose, Petitioner's Treasurer's department provided financing, cash management and foreign exchange services to certain affiliated corporations, including first-tier and second-tier subsidiaries, whose commercial domiciles were in the United States (the "U.S. Corporations"); as well as to various affiliated corporations operating and incorporated in Latin America (the "Latin American Corporations"). This structure allowed the U.S. Corporations and the Latin American Corporations (collectively referred to as the "Related Corporations") to pool their resources to obtain the most cost effective financing possible. 3. Petitioner obtained the monies needed to finance the Related Corporations by borrowing money in commercial markets through the issuance of commercial paper, consisting primarily of short-term promissory notes. Petitioner issued the commercial paper since it was able to borrow money at more favorable interest rates than was available to the Related Corporations. 4. Pursuant to the directives of Siemens A.G., Petitioner established a cash management system to fund the U.S. Corporations. The cash management system was administered by Petitioner's Treasurer's department located in the City. During the Tax Years, approximately nine people were employed in the Treasurer's department -- five of whom had professional degrees. Of the five professionals: one participated in the cash management system, a - 6 -

8 second participated in facilitating loans to the Latin American Corporations, and a third participated in both activities. The cumulative annual compensation paid to those three professionals was approximately $150, As part of its cash management system, Petitioner and the U.S. Corporations maintained various bank accounts throughout the United States including: (a) one concentration account in the City; (b) two master accounts in separate banks outside the City; and (c) lockboxes in several banks across the country. On the disbursement side of the cash management system, the U.S. Corporations paid their expenses with checks drawn on one of the two master accounts maintained with banks located outside the City. On the collection side, the U.S. Corporations deposited their customers' checks into the lockboxes located throughout the country. The deposited funds were transferred on a daily basis into Petitioner's concentration account located in the City. The concentration account was used to fund the two master accounts. 6. Any excess of the amounts that one of the U.S. Corporations drew by check from a master account over the amounts that it deposited in a lockbox, was treated as a loan from Petitioner to that corporation. 6 Petitioner charged the U.S. Corporations interest at a rate equal to the borrowing costs incurred on its commercial paper plus a small fee to cover administrative expenses. No written promissory notes were executed evidencing such loans. Instead, these loans were reflected in Petitioner's internal accounting system. 7. If there was a deficit in the concentration account, Petitioner, as part of its daily cash management activity, issued 6 Petitioner never solicited loans in the traditional sense of the term. Nor did it investigate the credit worthiness of the U.S. Corporations or negotiate the terms of the loans to them

9 commercial paper in the U.S. commercial paper market. If, however, there were excess funds, the cash surpluses were deposited in banks in the form of time deposits such as certificates of deposit. These time deposits generally were made in foreign banks which paid higher interest rates than U.S. banks. 8. Siemens A.G. also delegated to Petitioner's Treasurer's department the responsibility for financing the Latin American Corporations. It did so due to time zone considerations -- as Petitioner was in or near the same time zones as the Latin American Corporations -- and because Petitioner's participation in the U.S. commercial paper market afforded it greater access to U.S. dollars. 9. The Latin American Corporations did not participate in Petitioner's cash management system. Instead, Petitioner provided funds to the Latin American Corporations through participation 7 loans and the Back-To-Back Loans, both of which generally were of short duration. With regard to the Back-To-Back Loans, Petitioner deposited funds as time deposits in foreign banks -- the CDs. The foreign banks simultaneously lent identical amounts of money to the Latin American Corporations -- the Back-To-Back Loans. The CDs were evidenced by written confirmations which indicated the dates of the deposit, the dates of maturity, and the rates of interest to be paid. The Back-To-Back Loans were evidenced by written promissory notes payable by the Latin American Corporations to the lending foreign banks. Petitioner negotiated the terms and conditions of the CDs and Back-To-Back Loans with the foreign banks, and redrafted the loan documents where necessary. The interest rate earned on the CDs approximated the interest rate charged by the foreign banks to the Latin American 7 In the participation loans, the foreign banks lent money to the Latin American Corporations and, immediately thereafter, sold those loans to Petitioner. The treatment of income from these loans is not at issue

10 Corporations on the Back-To-Back Loans. Petitioner thus did not profit from the Back-To-Back Loans, but merely received the same rate on the CDs that it would have received had they not been used to secure the Back-To-Back Loans. The foreign banks charged the Latin American Corporations either additional interest or a service fee ranging from between 1/4% to 1/2%. 10. Petitioner used Back-To-Back Loans (rather than direct loans) to finance the operations of the Latin American Corporations for two reasons. The first was its desire to insure that it would be able to repatriate to the United States the funds transferred to Latin America. Petitioner was concerned that if it made the loans directly to one of the Latin American Corporations, the government of that country might seek to restrict the repatriation of such funds to the United States. Petitioner also used the Back-To-Back Loans to reduce the amount of withholding tax imposed by foreign governments. 11. Throughout the Tax Years, Petitioner was licensed to transact business in Wisconsin. Throughout that period, it filed Wisconsin Foreign Corporation Annual Reports ("Wisconsin Annual Reports") in which it identified its business as consulting in the field of electrical engineering. All such consulting work was performed by Dr. Kurt Arndt, on a full time basis, for Siemens- Allis Corporation ("Siemens-Allis") -- a Delaware corporation which owned manufacturing facilities in West Allis, Wisconsin Dr. Arndt worked in Wisconsin during the Tax Years. Petitioner paid Dr. Arndt $59,053 and $62,234, respectively, in 8 Petitioner initially owned 50% of the stock of Siemens- Allis. By 1983, Petitioner had increased its stock ownership to 100%

11 and 1982, and issued Federal Forms W-2 to him. These forms list Dr. Arndt's address as 2940 San Raphael Drive, Brookfield, Wisconsin. These forms also indicate that federal income tax, FICA, and Wisconsin income tax were deducted from Dr. Arndt's salary. Petitioner marked an "x" on the Forms W-2 near the spaces indicating that Dr. Arndt was a participant in a "Pension Plan." Petitioner charged Siemens-Allis the exact amount of Dr. Arndt's salary during the Earlier Tax Years as indicated on the Forms W-2. Petitioner listed the amounts of the reimbursements of Dr. Arndt's salary from Siemens-Allis as "Wisconsin Business" on line 10(d) of its Wisconsin Annual Reports. Petitioner also filed Wisconsin Corporation Franchise or Income Tax Returns ("Wisconsin Tax Returns") Dr. Arndt worked out of an office provided to him by Siemens-Allis (the "Wisconsin Office"). Petitioner indicated that due to the lapse of time between the performance of Dr. Arndt's services and the hearing in this matter, no one was available who could testify as to what services Dr. Arndt provided to Siemens- Allis, how he was supervised by Petitioner, or any of the particulars concerning the provision of office space to Dr. Arndt. All that Petitioner introduced into the record was a July 16, 1985 letter from Dr. Arndt to Eric Kangas which indicated that Dr. Arndt was an electrical engineer who specialized in the electric insulation of motors and generators, and was in charge of 9 Although the testimony indicated that Dr. Arndt worked in Wisconsin throughout all of the Tax Years, no documents were presented with respect to the 1983 Tax Year. 10 Aside from Dr. Arndt's services as an electrical engineering consultant, Petitioner's only other contact with Wisconsin was that it extended loans to another affiliate, Allis Chalmers Power Services, Inc. ("ACPS"), which was domiciled in Wisconsin. Petitioner's gross income in the Earlier Tax Years included interest income of $607,556 and $574,000 respectively from ACPS which was not treated as Wisconsin gross receipts in the Wisconsin Tax Returns for purposes of computing the Wisconsin apportionment formula

12 coordinating the transfer of German electrical insulation technology developed by Siemens A.G. to Siemens-Allis needed to upgrade Siemens-Allis' substandard facility. 14. Prior to the Merger, SC's tax department (the "Tax Department"), was comprised of 10 to 15 individuals. The Tax Department worked out of offices located in Iselin, New Jersey which were rented by Siemens Medical Systems, Inc. from an unrelated third party (the "New Jersey Office"). The Tax Department did tax research and compliance work in a number of areas, including income, franchise, payroll, property, and sales and use tax; and performed all of the tax functions for Petitioner and its subsidiaries. 15. As a result of the Merger, the Tax Department became a part of Petitioner. Employees of Petitioner assigned to the Tax Department continued to work out of the New Jersey Office, providing tax services to Petitioner and the U.S. Corporations. For the 1983 Tax Year, Petitioner filed a New Jersey Corporation Business Tax Return (the "New Jersey Return") which indicated that it paid wages of $400,878 to approximately 17 individuals who worked in its Tax Department in New Jersey. Petitioner listed total New Jersey receipts of zero and the average value of New 11 Jersey real and tangible personal property owned of $30,800. The New Jersey Return indicated a principal New Jersey Corporation Business Tax liability of $162, During the Tax Years, Petitioner filed corporate tax returns in the City, State, California, and Wisconsin. For the 11 The 1983 Tax Year is the only one of the Tax Years during which Petitioner reported a City property factor of less than 100% on its GCT Return. The amount reported was % which was derived by comparing reported City property of $8,478,527 to reported total property everywhere of $9,229,707. See, Finding of Fact, 18, infra

13 1983 Tax Year, Petitioner filed a corporate tax return in New Jersey. On its California, New Jersey, and Wisconsin corporate tax returns, Petitioner used a three factor apportionment formula to determine the amount of income that was apportionable to, and taxed by, that state. The apportionment percentages reported by Petitioner to each of the other taxing jurisdictions were: California % % % New Jersey N/A N/A % Wisconsin % % % Total 2.88% 2.77% 1.61% 17. Petitioner timely filed GCT returns for the Tax Years (the "GCT Returns"). In those returns, Petitioner reported a business allocation percentage ("BAP") of less than 100% for each of the Tax Years. Petitioner computed its GCT liability for the Earlier Tax Years on the basis of allocated income. For the 1983 Tax Year, Petitioner computed its GCT liability on the basis of allocated capital as that yielded the greatest tax liability of the four alternatives bases. During the Earlier Tax Years, Petitioner failed to list a regular place of business located outside the City on Schedule H of the GCT Returns. However, on its GCT return for the 1983 Tax Year, Petitioner indicated that it had four offices outside the City, located in: New Jersey; Washington, D.C.; Wisconsin; and Windsor, Connecticut On its GCT Returns, Petitioner reported the following factors and BAPs for each of the Tax Years: 12 Petitioner listed the street addresses along with the rent paid for the New Jersey and Washington, D.C. offices. Petitioner did not provide street addresses or indicate the amount of rent paid for either the Wisconsin or the Connecticut offices

14 1981 New York City New York City Everywhere Percentage Tangible Property $ 915,147 $ 915, % Receipts 1,331,001 1,331, % Wages 449, , % BAP % 1982 New York City New York City Everywhere Percentage Tangible Property $1,278,702 $1,278, % Receipts 884, , % Wages 529, , % BAP % 1983 New York City New York City Everywhere Percentage Tangible Property $8,478,527 $9,229, % Receipts 400, , % Wages 1,545,385 2,133, % BAP % 19. In determining the receipts factors for its BAPs as reported on the GCT Returns, Petitioner took into account (as both City and total business receipts) only a portion of the income characterized on its Federal Form 1120 as "Other Income" -- $1,331,001 in the 1981 Tax Year, $884,757 in the 1982 Tax Year, and 13 $400,000 in the 1983 Tax Year. According to Petitioner's Federal Forms 1120, Petitioner had interest income of $74,049,291 in the 13 In the 1981 Tax Year, Petitioner reported "Other Income" of $1,937,119; $1,331,001 of this amount was characterized as "commissions." In the 1982 Tax Year, Petitioner reported "Other Income" of $1,052,130; $884,757 of this amount was characterized as "Com. & Other Inc. Siemens Group USA." In the 1983 Tax Year, Petitioner reported "Other Income" of $414,902; $400,000 of this amount was characterized as "Com. & Other Inc. Siemens Group USA."

15 Tax Year; $92,625,928 in the 1982 Tax Year; and $73,690,966 in the 1983 Tax Year. 20. On October 2, after the commencement of Respondent's audit of Petitioner but prior to its completion -- Petitioner filed three separate Claims For Credit or Refund of Corporate Tax with Respondent seeking refunds of GCT in the following amounts: $214,434 for the 1981 Tax Year, $404,993 for the 1982 Tax Year, and $97,135 for the 1983 Tax Year; for a total of $716,562 (the "Refund Claims"). Petitioner's representative, Mr. Payne, signed each of the Refund Claims as Petitioner's Vice President, Taxes. 21. In the Refund Claims, Petitioner asserted that the Nondomiciliary Interest Income was business income (rather than investment income as Petitioner had originally reported in the GCT Returns). Respondent did not dispute this assertion. Petitioner further asserted that, in computing its BAPs, the Nondomiciliary Interest Income should be sourced to the payors' commercial domiciles outside the City and thus not be treated as City receipts; i.e., they should only be included in the denominator of the receipts factor. Respondent disputed this assertion. For the 1983 Tax Year, Petitioner asserted that its business capital should be decreased from the $104,043,576 reported on its GCT Return to $64,550,850 and made additional claims for the 1983 Tax Year which are not in dispute. follows: 22. Petitioner recomputed its BAPs in the Refund Claims as 14 $110,938 of which was characterized as "interest on obligations of the United States and U.S. instrumentalities."

16 1981 New York City New York City Everywhere Percentage Tangible Property $ 915,147 $ 915, % Receipts 15 1,211,394 17,876, % Wages 449, , % BAP % 1982 New York City New York City Everywhere Percentage Tangible Property $1,278,702 $ 1,278, % Receipts 1,209,146 17,916, % Wages 529, , % BAP % 1983 New York City New York City Everywhere Percentage Tangible Property $8,478,527 $ 9,229, % Receipts 275,034 17,516, % Wages 1,545,385 2,133, % BAP On March 6, 1992, Respondent issued a Notice of Determination to Petitioner. The Notice of Determination asserted the following GCT deficiencies for the Earlier Tax Years and granted $29,235 of the $97,135 requested refund for the 1983 Tax Year: 15 Petitioner never explained how the City receipts reported on its GCT Return for the 1981 Tax Year (all of which were attributable to commission income) decreased from $1,331,001 to $1,211,394, when the reported change should have yielded an increased amount of receipts attributable to the City since Petitioner received $4,432,000 of interest from Chappell & Co., whose commercial domicile was in the City. Petitioner apparently recognized this error and corrected it in its brief by increasing its City receipts to $5,763,001 (i.e., $1,331,001 plus $4,432,000). See Finding of Fact 27, infra

17 16 Tax Period Principal Interest Total 10/1/80-9/30/81 $ 315, $ 608, $ 923, /1/81-9/30/82 259, , , /1/82-9/30/83 (29,235.00) (36,576.00) (65,811.00) Total $ 545, $ 999, $1, The primary bases of the adjustments in the Notice of Determination were that: (a) Petitioner did not have an office outside the City and therefore its BAP must be 100% for each of the Tax Years; (b) Petitioner's business interest receipts should have included the $4,960,613 of Back-To-Back Income for the 1982 Tax Year; (c) Petitioner should have included the Siecor Income of $770,556 for each of the Earlier Tax Years and $905,667 for the 1983 Tax Year as business income; and (d) Petitioner's business capital for the 1983 Tax Year was $82,268,249 (rather than the $64,550,850 reported in the Refund Claim). Petitioner disputes adjustments (a) and (b), but not (c) and (d). Respondent made other adjustments which are not in dispute. 24. On June 4, 1992, Petitioner filed a Petition requesting a redetermination of the $545,394 of net principal tax deficiencies asserted in the Notice of Determination, as well as a refund of $716,562; i.e., the amount previously requested in the Refund Claims. The refund amount requested on the Petition fails to take into account that $29,235 of the $97,135 refund claimed for the 1983 Tax Year was allowed by the Commissioner in the Notice of Determination. 25. Petitioner, in its initial brief dated August 9, 1995, provided the following schedule of the sources of its interest income which it asserted to be business income: 16 Interest was computed to March 31,

18 Amount Amount Domestic affiliate domiciled in New York City [Chappell & Co.] $4,432,000 $523,000 Domestic affiliates domiciled outside New York City 16,335,156 16,527,652 Foreign affiliates domiciled outside the U.S. 1,004, ,286 Other non-affiliated foreign residents 2,422,305 2,695,647 $24,428,737 $20,249, Excluding the income from the domestic affiliate domiciled in the City (Chappell & Co.), the above interest income -- $19,996,737 for the 1981 Tax Year and $19,726,585 for the 1982 Tax Year -- constitutes the amount of Nondomiciliary Interest Income whose categorization is at issue Petitioner asserted in its August 9, 1995 brief that its BAPs for the Tax Years were: 17 In the hearing sessions held on July 26, 1993, Petitioner introduced into evidence Exhibits 4 and 7 to substantiate its sources of interest income for the Earlier Tax Years. Without explanation, Exhibit 4 (which was prepared several months after Exhibit 7) changed $200,000 from ACPS to notes and accounts receivable and switched Sigri Carbon from being a foreign to a domestic affiliate. Also without explanation, Petitioner's brief relied on Exhibit 7 for the 1981 Tax Year but Exhibit 4 for the 1982 Tax Year. While the inconsistent use of such conflicting exhibits is troubling, the differences between these two exhibits do not affect the sourcing of Petitioner's income for purposes of this determination. 18 The language used to categorize this income in Petitioner's brief is not identical to that used in Exhibits 4 and 7. However, Respondent does not dispute the accuracy of Petitioner's categorization of such income in its brief and such categorization does not appear to be an unreasonable extrapolation of the relevant exhibits

19 1981 New York City New York City Everywhere Percentage Tangible Property $ 915,147 $ 915, % Receipts 5,763, ,548, % Wages 449, , % BAP % 1983 [sic] 20 New York City New York City Everywhere Percentage Tangible Property $8,478,527[sic] $ 9,229,707[sic] % 21 Receipts 1,407,757 21,134, % Wages 529, , % BAP % 19 Petitioner appears to have computed its total receipts used to determine the receipts factor of its BAPs for the Earlier Tax Years by adding the total amount of its interest income from the categories reported on Exhibits 4 and 7 to the amount of receipts originally reported on the GCT Returns as commission income. However, the total amount of Petitioner's interest and commission income for the 1981 Tax Year -- $24,213,843 plus $1,331,001 or $25,544, is $4,001 less than the $25,548,845 amount used in Petitioner's brief. As no explanation has been provided by Petitioner as to how it obtained the higher number and there is no evidence in the record justifying the use of the higher number, the lower amount of $25,544,844 should be used as the denominator of Petitioner's BAP receipts factor for the 1981 Tax Year. 20 The Tax Year was mistakenly listed as 1983 instead of 1982; which may explain the further typographical error explained in the Footnote 21, infra. 21 Petitioner made a typographical error by inserting the 1983 property numbers (in dollars) in both the 1982 and 1983 columns; i.e., $8,478,527 for the City and $9,229,707 for everywhere. In computing the % BAP for the 1982 Tax Year, however, Petitioner did not use the % figure provided in the brief but instead used the 100% property factor provided in its 1982 GCT Return. The property factor for the 1982 Tax Year should thus include property in the City and everywhere of $1,272,

20 1983 New York City New York City Everywhere Percentage Tangible Property $8,478,527 $ 9,229, % Receipts 400,000 20,841, % Wages 1,545,385 2,133, % BAP % 27. For the 1983 Tax Year, there is no equivalent to Exhibits 4 and 7 to support Petitioner's assertion, in its brief, as to the amount of its total business receipts, including interest income. Even though business capital is allocated according to BAP, Petitioner apparently mistakenly assumed that its BAP was irrelevant for the 1983 Tax Year since it computed its GCT for that year based on its allocated capital. 28. Petitioner asserts in its brief, without any explanation of how that figure was derived, that it had total business receipts of $20,841,845 for the 1983 Tax Year. That figure, however, is contradicted by Petitioner's own tax returns and there is no clear support for that figure in the record. The highest amount of business receipts clearly corroborated by the record is the $17,516,325 of total business receipts reported on the Refund Claim. The $17,516,325 of reported receipts, however, do not include the $905,667 of income from the Siecor Note which Petitioner treated as investment income but now concedes is business income. Accordingly, Petitioner's total business receipts for the 1983 Tax Year is found to be $18,421,992 ($17,516,325 plus $905,667). 29. Petitioner's assertion that it had only $400,000 of City business receipts for the 1983 Tax Year is, however, supported by Petitioner's GCT Return which is in the record. Such figure is not disputed by Respondent. Moreover, page K-9 of Respondent's Exhibit

21 B3 (entitled: "Detail of interest income from other AFFS [affiliates] & 3rd [third] PTYS [parties]" for the Tax Years," which was attached to the auditor's workpapers, does not indicate that Petitioner received any interest income in 1983 from Chappell & Co. -- the only affiliate domiciled in the City from which Petitioner received interest income. Thus Petitioner's City receipts to be included in the numerator of its BAP receipts factor for the 1983 Tax Year is found to be $400, The receipts factor of Petitioner's BAP for the 1983 Tax Year is thus % ($400,000/$18,421,992); and its BAP is % (the average of %, % and %). STATEMENT OF POSITIONS Petitioner asserts that, by virtue of Dr. Arndt's presence in Wisconsin, it maintained a regular place of business outside the City during the Tax Years and thus is entitled to allocate its business income. Petitioner also asserts that the operation of its Tax Department in New Jersey, following the Merger, resulted in its having maintained an office outside the City during the 1983 Tax Year. Petitioner further asserts that even if it had no place of business outside the City, the Commerce and Due Process Clauses of the United States Constitution prohibit the use of a 100% BAP because Petitioner was operating in interstate commerce and was engaged in a unitary business. The Department asserts that Petitioner did not have a regular place of business in either Wisconsin or New Jersey during the Tax Years and thus cannot allocate its business income. The Department further asserts that the tax imposed on Petitioner's business operations was constitutional since Petitioner's business activities had a nexus within the City and the resulting tax was not unfair given that Petitioner's activities outside the City were de minimis

22 Assuming that it has a right to allocate its income, Petitioner asserts that since the Nondomiciliary Interest Income was paid by corporations domiciled outside the City, such income constituted business receipts earned outside the City and should not be included in the numerator of its BAP receipts factor. Petitioner further asserts that this forum is bound to follow the holding in the Appellate Division Opinion to that effect. Respondent agrees with Petitioner's assertion that the Nondomiciliary Interest Income constitutes business receipts. However, if Petitioner does have the right to allocate its income, Respondent argues that such income should be sourced to the City for purposes of computing the receipts factor of Petitioner's BAP, since the services relating to the underlying loans were rendered at Petitioner's office in the City. Respondent asserts that the Appellate Division Opinion is not binding precedent because the Appellate Division: (1) concluded that such income constituted "other business receipts" (instead of "services") based upon a concession by the State Commissioner, and (2) improperly relied upon a distinguishable Court of Appeals' decision. Petitioner asserts that the CDs which were issued in conjunction with the Back-To-Back Loans were correctly reported as investment capital for the 1982 Tax Year since certificates of deposit are treated as cash which, at the taxpayer's option, can be treated as either investment or business capital. Respondent asserts that the CDs should be disregarded and Petitioner should be treated as having made the Back-To-Back Loans (which should be treated as business capital) directly to the Latin American Corporations. Respondent does not, however, assert that the Back- To-Back Loans were made for any Federal or City tax avoidance purpose

23 CONCLUSIONS OF LAW Former section R (now section ) of the Code imposes the GCT for the privilege of "doing business, or of employing capital, or of owning or leasing property in the city,... or of maintaining an office in the city." Under former section R E (now section E) of the Code, the GCT is computed under whichever of four alternative calculations yields the greatest tax liability. One calculation is based on the amount of entire net income allocated to the City. Another calculation is based on the amount of business and investment capital allocated to the City. Regular Place of Business Requirement Former Code sections R (a) and R (now sections (a) and ), in effect during the Tax Years, permitted a taxpayer to allocate business income and business capital respectively within and without the City only if it had "a regular place of business outside the city other than a statutory 22 office." Petitioner claims that both the Wisconsin Office and the New Jersey Office constituted a regular place of business of 23 Petitioner outside the City. The Commissioner disagrees. Former GCT Regulation Section 4-11(b) (now 19 RCNY section 11-63(b)(2)) defined a regular place of business in pertinent part, to be "any bona fide office (other than a statutory office), factory, warehouse, or other space which is regularly used by the taxpayer in carrying on its business." Among the factors historically 22 The City regular place of business requirement has been repealed for tax years beginning after June 30, Ch. 625 (S.B B), Laws Petitioner did not assert that either the "office" in Washington, D.C. or in Connecticut, as reported in its GCT Return for the 1983 Tax Year, constituted a regular place of business

24 looked to by the courts in applying the now repealed State regular place of business requirement are whether the taxpayer: (1) held itself out as doing business at the claimed out-of-state office; (2) had a source of income from the claimed out-of-state office: (3) filed income or franchise tax returns and paid tax in the other state; (4) had business capital and income with a situs in the other state; (5) had full time employees at the claimed out-ofstate office; (6) was licensed to do business in the other state; (7) paid rent or utility bills for the claimed out-of state office; and (8) had one or more signs bearing its name at the claimed outof-state office. See, Alconox, Inc. v. State Tax Comm., 114 A.D.2d 575, 577 (3rd Dept., 1985); Adirondack Steel Casting Company, Inc. v. State Tax Comm., 107 A.D.2d 924, 925 (3rd Dept., 1985); Matter of Psychological Corp. v. State Tax Comm., 99 A.D.2d 905, 906 (3rd Dept., 1984); and Matter of UGP Properties, Inc. v. State Tax Comm., 64 A.D.2d 316, 319 (3rd Dept., 1978). As stated by the New York Supreme Court, Appellate Division in Adirondack Steel, supra at p. 925: The common tread running through the definition and factors is that the out-of- State place of business be income-generating. This conclusion flows logically from the purpose of the business allocation percentage, i.e., to determine "what amount of the taxpayer's income has a jurisdictional nexus with the State" (Matter of Westinghouse Electric Corp. v. Tully, 55 N.Y.2d 364, 375, 449 N.Y.S.2d 677, 434 N.E.2d 1044). 24 [Emphasis added.] In Matter of Arthur I. Maier Associates, TAT(E) 93-2 (UBT), 94-1 NYTC CT-110 (NYC Tax Appeals Tribunal, 1994), which dealt with a similar, former regular place of business requirement under the 24 (1984). Westinghouse, supra, rv'd on other grounds, 466 U.S

25 City Unincorporated Business Tax, the Appeals Division of this Tribunal stated: We recognize that most decisions have emphasized formalistic indicia to support the establishment of a regular place of business such as the payment of rent or utility bills, and/or the existence of a phone listing, signs bearing the taxpayer's name and full time employees. Nevertheless, it appears that the requirements imposed on the putative "place of business" are intended to satisfy two requirements: to ensure that the New York taxpayer does business there and to further ensure that the location is indeed intrinsically linked to the said taxpayer. [Emphasis added.] The Wisconsin Office Petitioner claims that it should be treated as having conducted business out of the Wisconsin Office since it: (1) was licensed to do business in the state of Wisconsin; (2) was holding itself out as doing business in Wisconsin; (3) had income from that location; and (4) filed income tax reports and returns in Wisconsin. Petitioner, however, failed to provide any evidence that it: (1) rented or owned office equipment in Wisconsin; (2) paid utility and phone bills; (3) was listed in a telephone directory; (4) had a lease for office space; (5) received correspondence or bills at that address; (6) had business cards using that address; or (7) that it sent or received correspondence at that address. For the Wisconsin Office to constitute a regular place of business of Petitioner, it must be "intrinsically linked" to the Petitioner's business. See Arthur I. Maier, supra. The only possible linkage between the Wisconsin Office and Petitioner is the provision of Dr. Arndt's services to a related entity

26 Petitioner's business, however, was to provide financial assistance to subsidiaries and affiliates of Siemens A.G. in furtherance of its parent's global operations, primarily by making and servicing loans to related companies. Dr. Arndt worked solely as a consultant to Siemens-Allis, a related electrical engineering company in whose facilities the Wisconsin Office was located. Moreover, the amount of reimbursement paid by Siemens-Allis to Petitioner for Dr. Arndt's services not only lacked any profit element but were de minimis in the overall scheme of Petitioner's operations. While Petitioner asserts that Dr. Arndt was its full-time employee, the only evidence in the record which supports that assertion are the Forms W-2 that were issued to Dr. Arndt during those years. However, corporations can, as a matter of convenience, file Forms W-2 with respect to employees of other related corporations. See, IRC section 3401(d); Rev. Rul , C.B See also, House of Ronnie, Inc. TSB-H-84(10)C. Furthermore, there is nothing in the record that would indicate that Dr. Arndt was Petitioner's common law employee (vis-a-vis the common law employee of Siemens-Allis); i.e., that Dr. Arndt was under its direction and control both as to the result to be accomplished and the means to be used. See, Former GCT Reg. 4-26(b) (now 19 RCNY 11-66(b)(2)). Petitioner has not offered any evidence whatsoever as to: (1) the nature of Dr. Arndt's duties either on a daily basis or in general; (2) whether any of Petitioner's officers or employees ever supervised Dr. Arndt in any respect; (3) who set Dr. Arndt's salary; and (4) who set Dr. Arndt's working hours. While no one of the above factors is controlling, given the overall paucity of the evidence provided, it cannot be found that the provision of Dr. Arndt's services to Siemens-Allis was intrinsically linked to Petitioner's business or that the Wisconsin Office was a space regularly used by Petitioner in carrying on its

27 business. Accordingly, it is found that the Wisconsin Office was not a regular place of business of Petitioner during the Tax Years. The New Jersey Office Petitioner commenced doing business in New Jersey on or about October 1, 1982 when, as a result of the Merger, approximately 17 individuals previously employed by SC became its full-time employees. These employees worked for Petitioner out of facilities 25 owned by an unrelated third party in New Jersey. These employees constituted Petitioner's Tax Department and had the responsibility for filing tax returns and preparing payroll for Petitioner and each of its separate operating subsidiaries. As Petitioner's Tax Department performed essential tax and payroll services through its employees who were located in the New Jersey Office, that office was intrinsically liked to its business. See, Arthur I. Maier Associates, supra. Consequently, the New Jersey Office was a regular place of business of Petitioner for the 1983 Tax Year. See, In the Matter of Merlite Industries, Inc NYTC CT-80 (NYC Tax Appeals Tribunal, May 1, 1996), in which our Appeals Division held that the determination of whether a taxpayer has a regular place of business outside the City is "not a game of lists and numbers;" and that the "factors" used to determine whether a taxpayer has a regular place of business "must be viewed in conjunction with the business being conducted by the taxpayer." Constitutionality of the Requirement Having concluded that Petitioner did not have a regular place of business outside the City during the Earlier Tax Years, I turn to Petitioner's assertion that the regular place of business requirement is unconstitutional. 25 There is no evidence in the record as to whether Petitioner or Siemens Medical Systems, Inc., its subsidiary, paid the rent on the leased space. The only testimony was that the lease was in the name of Siemens Medical Systems, Inc

28 A taxing jurisdiction may use formulary apportionment to allocate a taxpayer's income within and without the state. Container Corporation of America v. Franchise Tax Board, 463 U.S. 159 (1983). In order to pass muster under the Due Process and Commerce Clauses of the United States Constitution, the apportionment formula must be fair. Id.; Exxon Corp. v. Wisconsin Dept. of Revenue 447 U.S. 207 (1980); Mobil Oil Corporation v. Commissioner of Taxes of Vermont, 445 U.S. 425 (1980). To be fair, an apportionment formula must, under the above cases, be internally and externally consistent. Internal Consistency Internal consistency requires that the apportionment formula be such that if the same formula was applied consistently by every taxing jurisdiction, no more than 100% of a taxpayer's income would be taxed. Container Corp., supra, at 169. Under the City's apportionment formula, the existence of a regular place of business outside of the City is a prerequisite only to apportioning income outside of the City, but not to apportioning income to the City. Thus, if every taxing jurisdiction had the regular place of business requirement, any taxpayer that conducted an interstate business and only maintained an office in one jurisdiction, would be subject to double taxation. Although a material constitutional argument does exist under the internal consistency test, that argument cannot be addressed in this forum. Since statutes are presumed to be constitutional at the administrative level, the jurisdiction of this Tribunal does not include the authority to adjudicate whether a statute is 26 unconstitutional on its face as written. See, Matter of Nathan 26 This Tribunal is free only to address the validity of rules promulgated by the Commissioner, and not the legislative provisions which he is bound to enforce. See City Charter 168.a: "In appeals in which the rules of the commissioner of finance are at issue, the tribunal shall have the power and authority to rule on the legality